Educational Articles

Using the Value Line Page: Chevron and Exxon Mobil – September 9, 2011

Reuben Gregg Brewer
| September 09, 2011

Exxon Mobil’s (XOM – Free Value Line Research Report for Exxon Mobil) June, 2010 purchase of XTO Energy was its first significant acquisition since Mobil. The purchase makes the company the largest producer of natural gas in the United States. XTO brought with it reserves in five major shale gas plays, plus the technology to develop similar fields elsewhere. When considering these facts, not to mention the roughly $41 billion price tag, it’s no wonder that the acquisition made such headlines.

Exxon, however, isn’t the only integrated oil and gas giant adding to its gas exposure. In fact, Chevron (CVX – Free Value Line Research Report for Chevron) has been moving in the same direction, just without as much fanfare. Earlier this year, the company acquired shale gas acreage in the Marcellus Shale region, notably, Chief Oil & Gas, and Tug Hill holdings. This comes on top of an earlier purchase of Atlas Energy for some $3.3 billion in cash, and the assumption of pro-forma net debt of $1.1 billion. Atlas owned important properties in the Marcellus shale field. Chevron had already owned shale gas assets in Poland, Romania, and Canada prior to either of these moves.

Since natural gas prices have been languishing well behind those of oil, the moves these two integrated oil and gas companies have made might seem odd. That said, low natural gas prices mean that these two companies have been able to buy assets on “the cheap.” Moreover, there is a general expectation that natural gas will increasingly be used for power generation, among other things. This makes sense on several different levels, including gas’ relatively low price, the fact that it is cleaner than coal, and that it is “easy” to turn on and off gas powered generation, making such plants perfect for pairing with less reliable renewable energy options like solar (only available during the day) and wind (only available when the wind blows). So the long-term move into natural gas seems like a good one.

Is Exxon Mobil or Chevron the better choice?

As the Capital Structure box shows, debt is a very small percentage of the capital structures of both companies, coming in at under 10% in each case. Chevron, interestingly, has materially more cash on hand than Exxon Mobil (which can be seen in the Current Position box), and the latter’s $10 billion should be more than enough to keep the lights on for one of the world’s largest companies. Both companies receive high scores for Value Line’s proprietary Financial Strength (A++ in both cases) and Stock Price Stability (95 for Chevron and 100 for Exxon), as noted in the Ratings box at the bottom right of their respective reports. These scores, in turn, are used as the basis for each company’s top-notch score for Safety (1, Highest). This proprietary measure can be found in the Ranks box at the top left of the report.

Also in the Ranks box is Value Line’s Timeliness Rank. Both receive high marks, with Chevron earning the Highest possible score of 1 and Exxon Mobil not far behind with an Above Average score of 2. This suggests that both will perform better than the average stock over the next six to 12 months. So there are a lot of similarities between the two companies. Where things start to diverge is valuation.

Chevron’s recent Relative P/E was 0.55 compared to Exxon’s Relative P/E of 0.64, this figure can be found in the Top Label section of the report (this section runs across the top of the report). This suggests that investors are valuing Exxon shares more dearly. That said, both are toward the low ends of their respective historical trends, which can be seen in the historical portion of the Statistical Array. So, at present, Chevron appears a little “cheaper”.

However, an examination of the Business Description box, located right under the Statistical Array, can help explain why some might be more cautious of Chevron—unlike Exxon Mobil, Chevron hasn’t been fully replacing the reserves it pulls out of the ground. The figure that shows this is the reserve replacement rate, Exxon’s is just over 120% for the trailing 10-year period while Chevron’s is just 95% over the trailing five years. That said, both companies have plenty of reserves (oil and gas they have yet to pull out of the ground). Over shorter periods, strategic thinking may lead to the decision of not fully replenish the reserve, but, longer term, it is not the best strategy. This is something to keep an eye on with regard to Chevron.

So, there is a pretty solid reason why investors would give Exxon a higher valuation than Chevron. Still, neither is in any danger of going out of business, which allows Chevron plenty of time to find new reserves (such as by adding to its gas assets). In the meantime, this valuation difference also leads to Chevron shares yielding more than Exxon shares (recent yield can be found in the Top Label section of the report). Moreover, as the Rates box displays, earnings and dividend growth rates for the two companies are roughly similar, so one isn’t giving up dividend growth for dividends now.

In the end, the two companies are very similar. Sticking with household names would probably lead one to invest in Exxon Mobil shares. However, those in search of dividend income would do well to consider Chevron shares, so long as a little extra risk is agreeable.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.